Crude Oil: Markets Fear Escalation of Middle East Conflict, Opportunity for Long Reversal?

At the beginning of the Asian market session on 6 August, international oil prices ran shakily, with US crude oil currently trading near $73.90 per barrel. Oil prices shook lower on Monday as the global stock market sell-off continued. Still, the oil market's losses were limited by market concerns that Iran could retaliate against the assassination of a Hamas leader in Tehran, leading to a wider war in the Middle East.

Brent crude futures closed down $0.51, or 0.66 percent, at $76.30 a barrel on Monday, trading near their lowest level since January. U.S. Crude futures fell $0.58, or 0.79 percent, to close at $72.94 a barrel on Monday.

Stocks fell from Asia to North America as investors fled riskier assets while betting that the Federal Reserve would need to cut interest rates quickly to boost U.S. economic growth.

In a morning report, Phil Flynn, senior analyst at Price Futures Group, wrote, “Stocks fell on Monday as the jobs report that came out (on Friday) convinced the market that the Fed was once again behind the curve.”

However, in the Asian market on Tuesday, overseas stock markets began to embark on a rebound, because overnight out of the U.S. ISM non-manufacturing PMI data tough market expectations, and in the glory line above 50, easing the market's concerns about the U.S. recession, crude oil demand outlook concerns have also been eased.

Analysts pointed out that U.S. Service sector activity rebounded from a four-year low in July as orders and employment increased, which could help quell recession fears sparked by last month's spike in the unemployment rate.

The Institute for Supply Management (ISM) said Monday that the U.S. non-manufacturing Purchasing Managers' Index (PMI) rose to 51.4 in July, compared with 48.8 in June, which was the lowest level since May 2020. a PMI figure above 50 suggests that the service sector, which accounts for more than two-thirds of the economy, is showing growth.

According to ISM, a prolonged period of the index above 49 usually indicates that the overall economy is expanding. Economists had previously expected the services PMI to rise to 51.0 in July.

Government data released on Friday showed that the unemployment rate rose to 4.3 percent in July from 4.1 percent in June, a nearly three-year high. The labor market is now slowing as the Federal Reserve raises interest rates sharply in 2022 and 2023, dampening demand.

The ISM survey's new orders sub-index rebounded to 52.4 from 47.3 in June, the former being the lowest since December 2022. The services employment sub-index rose to 51.1 from 46.1 in June. This would support the view that the sharp slowdown in non-farm payroll job growth in July does not signal the start of a deterioration in the labor market.

Service inflation picked up slightly in July, but it may not be enough to change the picture that price pressures are weakening. The ISM's services input price index rose to 57.0 from 56.3 in June.

As of 09:42, the Nikkei 225 is currently up 7.5%, having risen 10.98% at one point earlier in the session, recovering most of Monday's losses, which saw the index close down 12.4% on Monday, the largest one-day drop in its history, while S&P 500 stock futures are currently up 1.22%, having risen 1.69% at one point early in the session. The stock market's expected rebound has also eased the market's selling pressure on commodities, and oil prices are also expected to see a rebound in the short term.

Also supporting oil prices are concerns that a wider Middle East war could lead to further supply disruptions.

Israel and the United States are bracing for a serious escalation in the Middle East. Previously, Iran and its allies Hamas and Hezbollah promised to retaliate against Israel for last week's killings of Hamas leader Ismail Haniyeh and a senior Hezbollah military commander. Markets fear that Iran's retaliation could lead to a wider war in the Middle East.

Hiroyuki Kikukawa, president of NS Trading, a unit of Nissan Securities, said, “Fears of escalating conflict in the Middle East have intensified, triggering fresh buying.”

Kikukawa said, “The market has largely factored in an Iranian retaliatory attack, so attention is focussed on the scale of the assault and Israel's counterattack.” If the conflict escalates, oil prices will rise, but if it is contained in the short term (as was the case with similar escalation fears in April), oil price gains will be limited, he said.

Israel and the U.S. are bracing for a significant escalation of the conflict after Iran and its allies Hamas and Hezbollah vowed to retaliate against Israel for the killing of a Hamas leader and a Hezbollah military commander last week.

U.S. Secretary of State Antony Blinken called the region a “critical moment.” A State Department spokesman said Monday that the U.S. has been urging other countries through diplomatic channels to tell Iran that an escalation in the Middle East is not in their interest.

U.S. officials said at least five U.S. Personnel were wounded Monday in an attack targeting an Iraqi military base. It was not immediately clear whether the attack was related to Iran's threat of retaliation.

Iranian President Pezeshkian told a senior ally of Russian President Vladimir Putin on Monday that Tehran was determined to expand its ties with “strategic partner Russia,” Iranian official media reported.

On the supply side, documents and vessel monitoring data showed that OPEC member Venezuela's oil exports fell in July due to the failure of crude processing equipment, reducing available stocks in the country's main producing regions and delaying the loading of cargoes.

This trading day will come out of the EIA monthly short-term energy outlook report, investors need to pay attention to, in addition, pay attention to API crude oil inventory series data and geopolitical situation-related news, pay attention to the Federal Reserve official's speeches, and the performance of global stock markets.

Technical point of view, oil prices on the last trading day of February 5 low of 71.39 above the support, recorded a longer lower shadow, suggesting strong buying on the low side, short-term downside risk has been weakened, oil prices deviated from the averages farther, the short-term is expected to usher in the opportunity to adjust to the shocks, the initial resistance reference to the last week's low point of 74.59 near the location of the 5-day SMA resistance in the vicinity of 75.56, if it can be recovered in the location, it is expected to open a larger rebound space.